The rebound for emerging markets stocks that started in earnest in 2016 is hitting some roadblocks this year. Year-to-date, the widely followed MSCI Emerging Markets Index is down 1.7% — more than double the S&P 500’s 2018 loss. To be sure, there are viable fundamental factors weighing on emerging markets equities this year.
The specter of 3% yields on 10-year Treasuries and an accompanying spike in the U.S. dollar are making emerging markets investors jittery. A strong dollar raises external financing costs for developing world dollar-denominated debt.
Then, there’s the Trump Administration’s persistent talk of trade wars, particularly with emerging-markets-behemoth China. Add to that rising oil prices, which can crimp developing world economic growth because many of the largest emerging markets are net oil importers.
Additionally, emerging markets are not nearly as inexpensive as they once were.
“Today, like most asset classes, EM stocks cannot really be described as cheap,” said Russ Koesterich of BlackRock. “They are trading close to their historical norm, both on an absolute basis and relative to developed markets.”
Still, tactical opportunities remain with emerging markets exchange traded funds (ETFs). Here are five emerging markets ETFs to consider.
Emerging Market ETF #1:
ALPS Emerging Sector Dividend Dogs ETF (EDOG)
Expense ratio: 0.60% per year, or $60 on a $10,000 investment.
The ALPS Emerging Sector Dividend Dogs ETF (NYSEARCA:EDOG) is currently a good deal. This yield-driven strategy resides 13.08% below its 52-week high. EDOG tracks the S-Network Emerging Sector Dividend Dogs Index, which looks “to identify 5 highest yielding securities (based on regular cash dividends) in each of the 10 Global Industry Classification Standard (GICS) sectors as of last trading day of November,” according to ALPS.
Because of its dividend focus, EDOG also gives investors an income-generating avenue to take advantage of rising commodities prices. The ETF allocates about 42 percent of its combined geographic weight to Brazil, Chile, Indonesia, Russia and South Africa — all of which are major commodities exporters.
Emerging markets are also expected to deliver solid dividend growth this year, further bolstering the case for EDOG. This emerging markets fund yields 4.40% — or more than double the yield on the MSCI Emerging Markets Index.
Emerging Market ETF #2:
American Funds New World F1 (NWFFX)
Expense ratio: 1.04% per year, or $104 on a $10,000 stake.
Among actively managed funds tracking developing economies, the American Funds New World F1 (NWFFX) is one of the more compelling options, even with its high expense ratio.
“American Funds New World’s relatively conservative approach, skilled management, and low fees make it a standout emerging-markets option,” according to Morningstar, which rates this emerging markets fund five stars.
NWFFX features a diverse asset mix, including stocks and bonds, as well as some U.S.-based companies with significant exposure to developing economies. Technology stocks account for 19.2% of the portfolio while the financial services and consumer discretionary sectors combine for 28.5%. NWFFX had portfolio turnover of 37% last year.
Emerging Market ETF #3:
iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)
Expense ratio: 0.40% per year, or $40 on a $10,000 stake.
The iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB), the largest emerging markets bond fund in the world, is down 3.25%, reflecting investors’ concerns about rising U.S. interest rates and a potentially stronger dollar. EMB’s holdings are denominated in dollars. However, those concerns may be overstated.
“To the extent EM countries have become less dependent on dollar funding and have improved their current account balances, they are less vulnerable to changes in the dollar,” said BlackRock.
Even with U.S. yields rising, EMB is a more compelling income avenue with a 30-day SEC yield of 4.92%. That would be a yield commensurate with junk bonds in the U.S. and to be sure, about 46% of EMB’s holdings are rated BB or B. Of the ETF’s top 10 country weights, only Mexico is likely to raise interest rates this year. Several other members of that group already have or will lower interest rates in 2018.
EMB has a rate-hedged equivalent, the iShares Interest Rate Hedged Emerging Markets Bond ETF (NYSEARCA:EMBH).
Emerging Market ETF #4:
iShares MSCI Frontier 100 ETF (FM)
Expense ratio: 0.79% per year, or $79 on a $10,000 investment.
In market classification terms, frontier markets are different than emerging markets. The former are usually smaller, less developed and less liquid markets. On the other hand, frontier markets offer some perks, including relatively low correlations to developed and emerging stocks as well as surprisingly low volatility.
Take the iShares MSCI Frontier 100 ETF (NYSEARCA:FM). FM has a lower three-year standard deviation the MSCI Emerging Markets Index and since coming to market nearly six years ago, has displayed relatively low correlations to major non-frontier equity benchmarks. FM is modestly higher this year while broad emerging markets indexes are lower.
Higher oil prices are helping the frontier fund. The ETF is home to Kuwaiti and Nigerian stocks, and both countries are members of the Organization of Petroleum Exporting Countries (OPEC). Other catalysts for FM include Argentina grabbing an emerging markets promotion and Vietnam being placed on the list for that promotion.
Argentina and Vietnam combine for 39% of FM’s geographic weight.
Emerging Market ETF #5:
Oppenheimer Emerging Markets Revenue ETF (REEM)
Expense ratio: 0.46% annually, or $46 on a $10,000 postion.
The Oppenheimer Emerging Markets Revenue ETF (NYSEARCA:REEM) is a smart beta avenue to developing world equities — and an affordable one at that. The largest emerging markets funds are usually cap-weighted, but REEM’s revenue-weighted approach has some advantages, including the ability to keep investors away from richly valued stocks.
Additionally, historical data indicate weighting stocks by revenue can reduce volatility and drawdowns when the growth factor is in style. Relative to the MSCI benchmark, REEM is significantly overweight South Korea while being underweight China and Taiwan. REEM is also an avenue for tapping rebounding commodities prices as it is overweight the energy and materials sectors compared to the MSCI index.
REEM’s “approach also avoids the traditional index’s bias towards overvalued stocks, while maintaining a fully transparent investment process and offering the broad market diversification that has historically attracted investors to index strategies,” according to Oppenheimer.
Todd Shriber does not own any of the aforementioned securities.